Tax professionals are urging the EU to overhaul and harmonize VAT grouping legislation to eliminate uncertainty and avoid double taxation for businesses.
The uncertainty stems from member states' interpretations of the EU VAT Directive on VAT grouping, as well as CJEU rulings in the Skandia case (C-7/13) in 2014 and the Danske Bank dispute (C-812/19) in 2021.
The CJEU cases established guidelines for how EU companies should handle intra-company and cross-border branch transactions. Head offices must charge VAT to their cross-border branches in intra-company transactions, according to the rulings, because they are considered separate taxable entities.
However, taxpayers are perplexed by member states' inconsistent interpretations of case law when evaluating VAT groups and cross-border transactions, including the application of VAT obligations by tax authorities in either jurisdiction of transactions.
"The problem is that some countries such as Germany disregard this ruling in some ways and say these VAT groups don’t conform to the German interpretation, so they disregard the VAT group of the transacting entity," says Matthias Fri, a partner at Svalner Tax & Transaction in Stockholm.
"It means that you now have a mismatch in VAT treatment between member states which results in either non-taxation or double taxation," he continues.
The rules, according to Gorka Echevarria, global VAT leader at Lexmark International in Geneva, are outdated and in need of revision because they only consider VAT groupings from a domestic rather than a cross-border perspective.
The CJEU relied on Article 11 of the VAT Directive in its Danske decision to hold that VAT grouping was limited by the territory in which an entity's head office was located, where it was also a member of a VAT group, and where its branch was located.
"A member state may not provide for a VAT group to include persons established in another member state," the court ruled.
Despite the CJEU ruling, Fri claims that mismatches in VAT grouping application between member states are a problem that makes it difficult for businesses to set up efficient tax planning structures.
Some countries, such as those in Scandinavia, have declared that VAT obligations do not apply to intra-company transactions involving the head office and cross-border branches, preferring to treat them as part of the same VAT group.
Meanwhile, other EU member states ignore the CJEU rulings, resulting in either no taxation or double taxation on intra-company transactions.
According to a top tax official, the issue of VAT groupings will continue to be a challenge for tax authorities as they attempt to resolve questions about the application of whole-entity VAT groupings in both EU and non-EU countries with EU branches.
According to him, tensions are likely to arise as EU member states try to reconcile competing national interests in the treatment of VAT groups. These tensions are likely to arise during legislative proposals or the implementation of CJEU judgments.
According to Fri, VAT groups may face opposition from some member states' tax authorities, while others may object retroactively or even prevent them entirely.
According to a leading UK tax expert, it would not surprise him if the EU tax authorities decided to retroactively apply the CJEU court rulings on the basis that they were simply confirming the EU VAT Directive.
The EU's inability to achieve unanimity among members for the necessary amendments to the EU VAT Directive is one of the main reasons for the uncertainty surrounding VAT groups.
In response to the economic crisis caused by the COVID-19 pandemic and the economic fallout from the war in Ukraine, some tax professionals have called on Europe to further increase EU VAT harmonisation.
"In the context of COVID-19, we are also calling for an overhaul and expansion to the VAT grouping to include non-established companies as a means to boost the EU economy … a pan-European type of VAT grouping," Echevarria says.
Non-established businesses would be able to join VAT groups with established businesses, and head offices would be able to conduct cross-border transactions with subsidiaries.
"It could allow, for example, a French company with a French head office to be part of the same VAT grouping as its German branch or subsidiary, which is something that is restricted at the moment under the EU VAT Directive," Echevarria continues.
Through a simplified VAT treatment process, head offices and subsidiaries would be able to offset their VAT receivables and payables, improving cashflow management while reducing administrative and compliance burden.
Instead of incremental changes resulting from CJEU court decisions, industry proposals like these require consideration and acceptance by member states in the form of legislation.
To provide certainty to taxpayers, tax authorities, and courts, legislators must agree on a common set of rules on intra-company VAT grouping and cross-border transactions. However, this appears to be easier said than done, particularly as EU member state governments face domestic economic challenges.
By fLEXI tEAM